Political tinkering a hurdle for savers

This election will be the second held since KiwiSaver's inception in 2007, and once again the scheme has become a political football.

As voters prepare to head to the polling stations on November 26, three major parties have some very different ideas about where the government savings programme should be heading.

The stakes are high because KiwiSaver now has more than 1.8 million members.

Labour, which introduced the scheme, wants to make it compulsory for all wage and salary earners, while gradually increasing employer contributions to reach 7 per cent by 2022.

Employee contributions will remain at 2 per cent under Labour's policy, and the party says it won't make any more changes to the member tax credit.

National, which in an attempt to ease the pain of recession-hit businesses cut employer contributions from 4 per cent to 2 per cent in 2009, shortly after it came into office, says it will introduce automatic enrolment for KiwiSaver in 2014, subject to New Zealand returning to surplus by then.

Changes announced in this year's Budget included increasing minimum employer and employee KiwiSaver contributions from 2 per cent to 3 per cent in 2013, while removing the tax exemption for employer contributions and halving the member tax credit.

The Green Party, which also supports auto-enrolment, wants to establish a "public option" seventh default provider managed by the Guardians of the New Zealand Superannuation Fund.

The Financial Markets Authority's annual report, released last month, showed 42 per cent - or $43 million - was charged in fees on fund earnings of $104 million for the six default providers of the scheme.

For non-default providers, 28 per cent, or $121 million, was charged in fees on earnings of $432 million, according to the FMA report.

The Green Party says the greater economies of scale provided by the public option could slash costs and boost retirement nest eggs by between $23,000 and $140,000 over a lifetime, depending on contributions.

And the party also says it will look at making the public fund the sole default provider when KiwiSaver is reviewed in 2014.

None of the three parties have any plans to change the option for members to withdraw their funds after three years to buy their first home.

But is all this political posturing healthy for the savings scheme, considered by many to be crucial for the nation's future wellbeing?

"[KiwiSaver] has become a political football," says Anthony Quirk, managing director of Milford Asset Management, a non-default provider. "It seems every election it's up for grabs and the poor long-term saver doesn't know where the goal posts are going to be moved to next time."

He says the fear of political tinkering is one of the main reasons why some people avoid signing up to the scheme.

"Nothing you're seeing in this election would change that view. In fact it's getting worse rather than better - you've got the three major parties all having different ideas about KiwiSaver."

David Ireland, who chairs the superannuation industry group Workplace Savings, says providers would love KiwiSaver to have a "set policy" that busy-fingered politicians were unable to fiddle with.

"But it's too attractive for the political parties to leave it alone, which means people do get confused," Ireland says.

"One of the reasons why some people aren't jumping into [KiwiSaver] is because they don't trust the government of the day not to play with it and change the rules."

Carmel Fisher, principal of Fisher Funds, another non-default provider, says it isn't helpful for the scheme to be used as a political bargaining tool, but at least it sparks a debate and all three parties' ideas are heading in the right direction.

"It's not like one party is saying 'we should abandon KiwiSaver because it's been useless', nobody's saying that," Fisher says.

"The tinkering that's being proposed shouldn't unsettle anybody that's currently in KiwiSaver - it's nothing like the changes that have been made in the past such as when the annual contribution rate was changed. That tinkering did result in costs going up for all the KiwiSaver providers, which obviously the members end up bearing."

Fisher's a fan of Labour's policy to make the scheme compulsory.

"We all recognise that we've got a problem looming in that we can't afford to pay for everybody's retirement and lifestyle so we've got to start contributing to that," she says.

"Making [KiwiSaver] compulsory cements a savings policy for the country which we haven't had to date. Leaving [the choice to save] up to individuals is not always the right thing to do."

Quirk says Labour's intention to continue Government contributions - the $1000 kick start and the member tax credit - under its compulsory scheme doesn't make sense.

"I would have thought one of the reasons you'd have a compulsory scheme, from a government point of view, would be to stop the need for that. Obviously if you have to go in there's no need for an incentive."

Michael Littlewood, co-director of the University of Auckland's Retirement Policy and Research Centre, says Labour's policy makes the incorrect assumption that New Zealanders are under-saving for their retirement.

"There is no evidence of that ... there is in fact evidence [from Treasury] that New Zealanders are slightly over-saving," Littlewood says.

A Treasury report released before this year's Budget cites a Colmar Brunton survey that found 71 per cent of the savings going into KiwiSaver would still have been saved if the scheme were not in place.

In other words, only 29 per cent of KiwiSaver contributions could be considered "new savings".

"If we accept the results of those Treasury reports then, to me, that tends to undermine the whole reason for having KiwiSaver - never mind increasing contributions," says Littlewood.

The fact that the increased employer contributions would be phased in at a rate of 0.5 per cent a year over nine years means businesses should find the changes manageable, Conway says.

BusinessNZ, a lobby group, disagrees.

"Over time, the employee will pay for [the increased employer contributions] - business will take it into account in setting wages and terms and conditions," BusinessNZ chief executive Phil O'Reilly told Radio New Zealand last month.

With employer contributions currently set at 2 per cent, and rising to only 3 per cent in 2013 under National's plan, many firms are actually spending a lot less on contributions than they would have under the company super schemes they had in place before KiwiSaver was introduced, which were often far more lucrative for workers.

"There's a lot of ifs, buts and maybes ... I don't think their hearts are really in it. I think they're doing it for political reasons more than anything else."

The Maori Party says it's concerned the Government is lessening its commitment to KiwiSaver.

"We are mindful that reductions in incentives may end up undermining confidence in the scheme," the party says.

Quirk says the Green Party's plan to introduce a seventh default provider is an interesting idea, but there are immediate difficulties with it.

The Super Fund is used to having investment capital guaranteed over a long period, but KiwiSaver members often withdraw their funds to move to other providers, he says.

"It's a different kind of mindset from where they [the Super Fund] know they've got a very long-term fund."

Quirk adds that making the public option the sole default provider, a move the Greens say they will consider in 2014, would run the risk of giving people the sense that the Government will "be able to get its hands on the money".

Fisher is similarly unconvinced about the Green Party's plans.

"There's nothing to suggest the Super Fund is going to do a better job than anyone else," she says. "I also agree with John Key that people will see that option as almost a government guarantee, when clearly it's not."

Green Party co-leader Russel Norman says the proposal doesn't amount to a state guarantee, but it could cut fees in line with the recommendations of the Savings Working Group, which said a larger scheme with a simple investment strategy would be less costly to run.

According to the working group's report, having a single default provider could result in an up to 6 per cent increase in KiwiSaver funds over 20 years, or a total increase in funds of $2.5 billion.

Fisher says that if the fees are so important the political parties should just back off and stop changing KiwiSaver.

"For every change [providers] need to make ... that all has to be passed on to the members."